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Thursday, September 3, 2020

Presidential Candidate Joe Biden’s Proposed Tax Plan


With the 2020 presidential election looming in less than 65 days, candidate Joe Biden is proposing some very progressive tax changes. The proposed tax increases will predominantly be shouldered by high-income households and corporate taxpayers, which could result in a modest slowdown of economic growth. Biden has proposed these tax increases to offset the costs of his policy initiatives, including increased spending on infrastructure, incentives for clean energy and domestic manufacturing, expanded access to healthcare, and increased funding for education and job training.

To date, Biden has made no mention of specific tax policies related to COVID-19.


Major Proposed Changes

  • Raise the corporate income tax rate from 21% to 28%.
  • The Amazon rule - Biden's tax plan calls for a minimum tax of 15% of book (GAAP) income on companies with $100 million or more in annual net income.
  • Double the tax rate on global intangible low-taxed income (GILTI) from 10.5% to 21% and add a new 15% alternative minimum tax on global book income.
  • Phase out the small business income deduction above $400,000. In its current form, once an individual attains $163,300 (or $326,600 for couples) in earnings, the deduction becomes complex with various requirements and nuances. Biden plans to simplify this by phasing out the deduction once earnings reach $400,000.
  • Increase payroll taxes. Currently, all income (not inclusive of investment income) earned by individuals up to $137,000 is subject to a 12.4% Social Security payroll tax. Any individual making $137,000 or more is not subject to the payroll tax. However, under the Biden plan, this exemption remains in place until an individual hits $400,000, whereby the 12.4% payroll tax is reinstated.
  • Raise the top income tax rate for individuals from 37% to 39.6% for taxpayers with more than $400,000 of taxable income.
    • In 2020, the top tax brackets apply to incomes over $518,400 for single filers and over $622,050 for married couples filing jointly.
    • Biden intends to phase out the qualified business income deduction (generally for pass-through income from partnerships and S corporations) for individuals with income above $400,000. These provisions would effectively increase the tax rate on some pass-through income from 29.6% to 39.6%.
  • Increase the long-term capital gains tax. Currently, capital gains taxes are 0%, 15% and 20% (the 20% bracket captures individuals with $441,450 in income and couples with $496,600). Biden wants tax filers with over $1 million in income to pay 39.6% on capital gains and qualified dividend income, regardless of the duration the assets are held. This does not include the additional net investment income tax of 3.8% (this is a tax for individuals with $200,000 in income or couples with $250,000). Together, tax on long-term capital gains and qualified dividends can rise to 43.4%.
  • Scuttle the step-up in basis rules. In their current state, step-up in basis rules allow an heir to take the fair market value of an asset or transferable property upon the death of the transferor. So, the heir would be subject to capital gains tax on the excess of fair market value over the basis of the property. It is not clear whether this tax will be imposed upon death or upon sale by the heir. It is also not clear whether there is an income or estate value threshold above which this rule will apply.
  • Limit the benefit of itemized deductions to 28%, irrespective of tax bracket.

Other Noteworthy Changes

  • Eliminate tax preferences for fossil fuels.
  • Eliminate tax breaks for prescription drug advertisements and any tax incentives for pharmaceutical companies to move production overseas.
  • Eliminate certain tax preferences for the real estate industry – for example, the $25,000 exemption from passive loss rules for rental losses, accelerated depreciation of rental housing, and deferral of capital gains taxes from like-kind exchanges.
    • Biden proposes to eliminate like-kind exchanges for taxpayers making more than $400,000 per year.
  • Tighten rules for independent contractors and increase penalties for misclassification.
  • Institute a fee on banks with $50 billion in assets or more to cover liquidation fees of failed financial organizations, thus providing a collective pool of funds for FDIC. Consequently, customers will not be left shouldering these costs from the bank failures.

Tax Incentives

Biden also proposes several tax incentives as part of his plans to address climate change and promote U.S. infrastructure investments. These individual and business proposals would:

  • Restore and expand the electric vehicle tax credit, with a focus on promoting consumer purchases of American-made vehicles.
  • Reinstate the solar investment tax credit.
  • Reinstate residential energy efficiency tax credits.
  • Expand tax deductions for energy technology upgrades, smart metering and other emissions-reducing investments in commercial buildings.
  • Enhance tax incentives for carbon capture, use and storage.
  • Expand the Low-income Housing and New Market tax credits

Monitoring the Landscape

On its face, revenue derived from the Biden tax plan presumably reduces projected deficits and debts at the expense of corporate and high-income taxpayers. The ultimate impacts of the Biden tax plan, however, depend on how (and whether) newly raised revenue is spent or allocated. For example, increases in tax rates on capital gains have historically reduced capital gain realizations and revenues.

It is clear, though, that Biden’s plan aims to balance the gap between the ultra-wealthy and low-income earners. This is consistent with the Democratic party platform. As with any presidential election year, no one will know the true impact for years to come. We’ll continue to monitor any adjustments to Biden’s proposal and will provide updates as they become available.

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